Question

1. a Explain why imperfect competition causes inefficient resource allocation with (1) a partial equilibrium graph and (2) a general equilibrium graph. (b) In general, what is the appropriate policy for dealing with imperfect competition when the imperfectly competitive firm is not a natural monopoly? (c) In such cases, it is important to determine the degree of market power. Briefly discuss various measures of market power (no derivations are Doho

Answer 1

Answer: (4 (a) explanation of why imperfect competition causes inefficient resource allocation with ( partial equilibrim graph: with imperfect competition we have quantity being deter- - mined as the point interaction of supply (me) with the MR came which results in an & Qc Cie amic Qc). • This im poses a lors on the total surplus of total wellbeing of the society equal to the area of triangleso mism)CES) · DMsm is the difference between monopoly and competitie price which tends to reduce the wantity demanded to a"? Graphite - np OM S sm ..mc am 0

18 (8) General Equilibrium graph: with monopoly outcome, the consumeris at a lower indifference came as compared to the optimum with a Competitive setup. Graph: Amon U comp mon opta MRT Slope MRS b) The appropriate policy for dealing cuith imperfect a competition when it is not a natural monopoly, * Appropriate policy will be to subsidize firm or the consumers to make them as well off as in the competitive getup. Regulation of the film with market power

help reduce distortion (C) It is important to determine degree of market power or not! * An important measure of market power is the market size or the share of the demand that it caters to higher the size, more is the market power concentration/ Index : (eI = 0 -> P.C] de of a total Industry output attributable to the fim. HH1: Herfintal; Hirschman Index depends upon the may ket share of participants · [HHI50 > PC]